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Licensing Removes Consumer Choice, Harms Poor - 11/28/2008

There are many professions and businesses in the US that require a license, which is simple a government grant to operate. Most licenses in our country have sprung up over the last hundred years, and are created and lobbied through the legislature by special interests.

The first licensing laws were created as a way to institute racial and class discrimination.  They prevented newly-liberated slaves from starting and owning their own businesses, putting them at a disadvantage to whites.  Licenses can also be prohibitively expensive, thereby allowing only those that already have money to enter into a job or industry.

In New York City, a special license is required to operate and drive a taxi.   The number of licenses is limited and has not been increased since 1937, so the only way to operate a cab legally in New York City is to purchase a license from someone who is retiring from the business.  Today, this special medallion sells for around $200,000 (and up).   For able-bodied drivers that don't have access to that kind of cash, they are unable to provide transportation services even to those that would willingly pay them.  For those that are able to afford the excruciating licensing costs, they must charge higher rates in order to make a profit with such overhead.  To do so, they tend to service only the affluent areas, leaving the lower-income areas without transportation services.  Those that are unlicensed but would provide a legitimate transportation service in lower-income areas for an affordable price are prevented by law from doing so.

In the early part of the 20th century, licenses in the health care industry were virtually unheard of.  An individual could cover their medical costs for about two dollars per year (in "1920 dollars", which would equate to about $50-$75 today for a year's worth of health coverage).

Dissatisfied with low-cost services, and the concept of common tradesmen sitting in judgment of the quality of services provided by well-educated doctors, small groups of physicians lobbied Congress to institute legislation that required physicians to be licensed in order to legally practice.   Licensing reduced the supply of physicians because many didn't meet the strict and arbitrary guidelines of the governing boards.  With a decrease in supply comes an increase in prices.  In fact, Congress was lobbied specifically because the cost of health care was too low.   And if Congress can fix anything, it's affordable pricing, as we can see from the high cost of health care today.

It's clear that licensing laws not only restrict entry into the market by the otherwise underprivileged, but they have the negative consequence of eliminating choice and increasing prices for the rest of us.   The common question that comes next is, "But without licensing laws, how do we protect consumers?"   That is indeed a very common question, given that all licensing laws are passed under the guise of protecting consumers.

Thinking about this for a moment, you can see that it might be insulting to people's intelligence.  Imagine if someone were to hang a sign on their garage that said, "Brain surgery, $100."  Would you patronize such an establishment?  I would say not.   Just as with any important purchases or life-altering decisions, you would seek out references, interview potential providers to learn if they had the needed skills, and research credentials to determine if you were comfortable with the provider or product.  This is true whether searching for a doctor, purchasing a car, a house, or deciding how to educate your children.  As consumers, we engage in due diligence to make sure that we were making the correct choices. In fact, licensing often interferes with this process, because it provides a false sense of security that someone else has done the research for us; and rarely, if ever, is that the case.